In March, Governor Polis signed a bill that codifies procedures for ratifying defective corporate actions into Colorado Law. Ratification statutes allow boards of directors to affirm corporate actions that were defective in some way. This type of statute has become a trend in state-level corporate law and brings Colorado in step with Delaware and many other states.
What are Ratification Statutes?
Statutes that create an administrative process to ratify defective corporate actions provide an avenue for corporations to ratify void or voidable corporate actions.
All corporate actions must comply with a corporation’s articles of incorporation, bylaws, resolutions, and other agreements. When corporations take unauthorized or illegal actions, those actions are void or voidable. Void actions are often illegal or not authorized by state law, for example issuing shares in excess of the number in a certificate of incorporation or entering into a contract for an illegal activity. Voidable actions are when a corporation acted within its power, but without proper authorization; for example, if a merger required shareholder approval, but the board took action without getting shareholder approval.
In states without ratification statutes, corporations may still ratify voidable actions. However, without a statute like Colorado’s, this remedy is only available at common law (common law is the legal term for judge-made law rather than legislature-made law). Typically, to use this provision, a corporation must request ratification from the courts; which can be costly and use unnecessary judicial resources.
Types of Ratification Statutes
There are three models of ratification statutes. The three models have much of the same content but vary in complexity. The first, created by Delaware, has two distinct provisions that describe self-help administrative procedures for ratification and the process for judicial review. The second, first drafted in Nevada, attempted to simplify the Delaware procedures. Statutes that follow the Nevada model only contain a single section and attempt to make the process more accessible. The third type, created by the American Bar Association (§ 1.45-52), breaks the process into several statutory sections and more closely aligns with the Delaware provisions.
What are the Colorado specific rules?
Colorado follows the American Bar Association’s Model Business Corporation Act sections on ratification of defective corporation actions. The Colorado law allows for ratification through an administrative process for either voidable corporate actions or when a corporation over issues stock, which is a void corporate action. These statutory provisions do not replace the availability of ratification at common law, but it does provide a more straightforward solution.
To take advantage of the new process, the corporation’s board of directors must adopt a resolution that states the corporate act to be ratified, the date of the act, a description of why the act was unauthorized, and evidence that the board approves the action. Once the ratification is properly executed by the corporation it is filed with the state.
If the action would have required shareholder approval to be valid when it was first made, the action must have shareholder approval to be ratified. The board of directors must notify the shareholders and have a vote on the ratification. Any quorum or voting requirements (simple majority or super majority) that were necessary to make the action not void or voidable at the time the action was first taken, are also required for ratification. If the vote is in regard to an over issuance of stock, Shareholders who hold shares from the stock over-issue are not eligible to vote on the ratification.
Why Does Ratification Matter?
Early stage or small businesses may have made corporate actions that are either void or voidable. These create uncertainty, as those actions could be reversed. When a corporation has this sort of volatility, it can be difficult to secure financing or engage in other corporate actions. Corporations may want to clean-up their corporate actions to come into compliance or to prepare for a merger or acquisition. Often when businesses are completing “due diligence” reviews before these major corporate actions, they are looking for void or voidable actions.